Presented before Alumni Federation of Columbia University, February 12, 1941

Vital Speeches of the Day, Vol. VII, pp. 343-345.

LESS than two years ago the business and financial journals in this country were viewing the federal government's unbalanced budget with alarm. The national debt was approaching the unprecedented level offorty billion dollars. This could not go on. Today the only question seems to be whether we should raise the debt limit to sixty-five billion dollars in one move, or only to sixty billion dollars so that the Congress may debate the question again in a year or so. The business and financial journals are no longer disturbed.

In January, 1939, one journal said: "When we as a Nation borrow too recklessly, we inevitably create debts which can impoverish us and are very likely to do so. This folly must be brough to an end." In January, 1941, this journal discusses the best way for the government to levy taxes and to float loans.

Another journal was quoting Senator Byrd with approval two years ago. "Too often in recent history liberal governments have been wrecked on the rock of loose financial policy." Today it is devoting a large part of its space to informing businessmen where and how to apply for government orders.

And a third journal that was advocating reduced expenditure in 1939 comments in its last issue: "There should be no forebodings regarding the effect of substantial additional borrowings. The debt recently suggested by the Secretary of the Treasury is not one which should imply the probability of currency, credit, security, or commodity inflation."

The implication of this seems to be that the purpose for which the funds are used, rather than the amount of the debt, determines its safety; and that borrowing for defense is safer, on the whole, than borrowing for work relief.

The economists are in general agreement that the way in which money is spent does influence the amount that may reasonably be borrowed, but they have been inclined to take the position that government borrowing is more appropriate in periods of declining business than in periods of rising business; and better also for constructive than for destructive purposes. This suggests that borrowing for work relief is safer than borrowing for defense.

At this point it is relevant to ask just what we mean by "safe". Most people are probably thinking in terms of the ultimate solvency of the government. Will it be able to pay interest, and principal when due? At the moment there is no reason to question this. Interest charges amounted to only 15 per cent of the government's tax revenues last year. There have been times in our national history when interest took 90 per cent of the government's tax revenues. Yet we succeeded in paying interest and principal in full. There is no immediate danger of government default.

There is a possibility, however, of marked inflation. During the First World War prices rose to nearly three times their pre-war level. There is a chance that we may repeat this experience. To date, the wholesale price index has risen only 6 per cent since the beginning of the war, and industrial production has increased 30 per cent. But this almost exactly parallels our experience in the first year and a half of the First World War, and after that production declined and prices skyrocketed.

Whether or not we repeat this experience depends on the amount and nature of government expenditures, the extent to which the government borrows, and the way in which it floats its loans. If defense expenditures continue to increase and the defense industries develop more bottlenecks, there is every reason to expect price increases in just those commodities that the government is purchasing, with a corresponding increase in government costs. If, in addition, the government must compete with a growing private demand for the output of the motor vehicle industry, say, price increases are unavoidable.

Government price fixing is, of course, possible. In fact Mr. Leon Henderson believes that prices can be kept down merely by "speaking" to the industry. He spoke quite firmly to the lumber industry two or three weeks ago. But price fixing is apt to lead to rationing and the problem becomes complicated indeed.

A simpler method of keeping prices down is to reduce private purchasing power by the amount that government purchasing power is increased. This can be done if the government meets its costs from current tax revenues, or it can be done by selling bonds to private investors rather than to the banks.

Federal tax levies, like the federal debt, are expected to reach an all-time high this year. Yet the estimated revenues for 1942 will meet less than half of the estimated cost of government. And it is doubtful if we can borrow the additional nine billion dollars without substantial price increases. If this is to be avoided taxes must be increased.

Specifically, the personal income tax is not yet at its potential peak. The British tax reaches much smaller incomes and starts at a rate of 42.5 per cent, although this is cut in half for the first $640. And at the other end the British rate rises to 90 per cent. The federal normal tax, surtax, and supertax, combined with the maximum New York state income tax rate, reaches only about 82 per cent today. We have not yet reached the limit of taxation at either end of the scale.

The excess profits tax, also, has important possibilities. This form of taxation is particularly appropriate under present conditions; since it recaptures part of the unusual profits from government spending that have escaped other controls. It is impossible to discuss here the many technical problems presented by this tax, but it may be said that the difficulties of an equitable levy are great, although not insuperable.

Selective sales taxes might also have a place in a defense tax program. General sales taxes are sometimes proposed because of the immediate and substantial returns from such taxes, but a general sales tax is regressive in its incidence and has some—although not all—of the disadvantages of a rapid increase in prices. If immediate returns are important the income tax might be collected at the source. This brings prompt returns, and avoids the difficulty of paying taxes on prosperity incomes in times of declining business. The selective sales tax could be used to check private buying of commodities, such as automobiles, for which government and private buying are in direct competition. If the commodities selected are not everyday necessities, these taxes will not prove regressive.

The Keynes plan for a graduated levy on wages, returnable in part after the emergency, when government costs are declining rapidly, has much to recommend it, since it reduces private purchasing power when government spending is high, and increases private purchasing power just when government spending is declining and an industrial depression threatening. The principal difficulty with this plan would probably be the selection of the period of redemption. No fixed date can be set if it is to serve the purpose, and the ultimate redemption might easily be deferred too long to achieve its purpose.

It should be possible, in economic terms, to balance the budget, since current government expenditures are necessarily for goods and services currently available; and a well constructed tax system will cause less hardship to the average citizen than rising prices resulting from government borrowing. But the government is not so clearly responsible for rising prices as it is for rising taxes; and there is no reason to believe that a balanced budget will be attempted in the immediate future.

Moreover, under present conditions a limited amount of borrowing has many advantages. Taxes are compulsory and loans are voluntary. The fact that the individual investors decide how much they can spare reduces the immediate hardship.

Insofar as the government sells bonds to private investors who put the bonds away in their safe-deposit boxes, inflation can be avoided. The United States Savings Bonds, three billions of which have been marketed in recent years, are eminently suited to this purpose; and in recent weeks the Treasury has manifested increasing interest in the private investor. The fact that hitherto little effort has been made to reach private buyers may be attributed in part to the pump-priming policy—a definite effort to achieve limited inflation—and in part to the fact that private investors demand a higher rate of interest than the banks.

It seems improbable, however, under present conditions,the the government could sell some nine billion dollars (the estimated 1942 deficit) to private investors, and further borrowing from the banks is indicated. Even borrowing from banks need not, of course, bring inflation. As long as there is unused productive capacity, increased buying may lead to increased production rather than increased prices. But with many plants already running to capacity it seems probable that in the near future increased borrowing from banks will bring rising prices rather than rising output. This means that the real choice before us it whether we are going to pay for defense through higher prices or through higher taxes.